Opinion
Case No. 01-2336-JWL.
November 2, 2004
MEMORANDUM ORDER
This garnishment action is presently before the court on the garnishee's motion to set aside the judgment that plaintiff seeks to satisfy from a policy of insurance issued by the garnishee (doc. #130). In the alternative, the garnishee seeks an order permitting discovery on the issue of whether the amount of the judgment is reasonable. As set forth in more detail below, the motion is denied. The court, however, concludes that material issues of fact exist concerning whether the amount of the judgment is reasonable and these issues will be resolved subject to the case management plan discussed below.
I. Procedural History
A brief review of the procedural history of this case is necessary to understand the posture of the case today. In the underlying negligence action, plaintiff John O'Shea alleged that he sustained injuries when the car that he was driving was struck by a car driven by defendant Anthony J. Welch, an employee of defendant American Drug Stores, Inc., d/b/a Osco Drug (Osco). In his complaint, plaintiff alleged that Mr. Welch was acting within the scope of his employment at the time of the accident such that Osco would be liable for damages to plaintiff under a theory of respondeat superior. Farmers Insurance Company (Farmers), Mr. O'Shea's underinsured motorist carrier, intervened. On March 21, 2002, this court issued an order dismissing plaintiff's complaint against Osco on the grounds that Mr. Welch, as a matter of law, was not acting within the course and scope of his employment at the time of the accident and, therefore, Osco was not vicariously liable for his negligence.
Thereafter, Mr. O'Shea, Mr. Welch and Farmers entered into a "Consent to Judgment, Assignment and Covenant Not to Execute" in which Mr. Welch and Farmers stipulated to entry of judgment against Mr. Welch in an amount to be determined by the court at trial. In consideration of Mr. Welch's concession of liability, Mr. O'Shea agreed not to execute the judgment against Mr. Welch's personal assets. Moreover, pursuant to the "Consent to Judgment, Assignment and Covenant Not to Execute," neither Mr. Welch nor Farmers objected to any evidence introduced by Mr. O'Shea or presented their own evidence at the bench trial. As a result, the "trial" was more akin to a default judgment hearing. In any event, after the bench trial, the court entered judgment against Mr. Welch in the sum of $1,014,503.70. Mr. O'Shea then filed the instant garnishment action against American Motorists Insurance Company (AMICO) seeking to recover any benefits applicable to Mr. Welch under the business auto policy AMICO issued to Osco. AMICO contested coverage. Mr. O'Shea and AMICO filed cross-motions for summary judgment. On May 21, 2003, the court concluded that the business auto policy covered Mr. Welch only if he was acting within the scope of his employment at the time of the accident. Thus, based on the court's prior ruling that Mr. Welch was not acting within the scope of his employment, the court granted AMICO's motion.
Mr. O'Shea appealed both the court's order granting summary judgment in favor of Osco and its order granting summary judgment in favor of AMICO. In the negligence action, the Tenth Circuit concluded that whether Mr. Welch was acting within the scope of his employment is a fact question for the jury; the panel thus reversed the entry of judgment in favor of Osco and remanded for further proceedings. See O'Shea v. Welch, 350 F.3d 1101 (10th Cir. 2003). In the garnishment action, the Circuit affirmed this court's interpretation of the policy to include Mr. Welch as an insured only if he was acting within the scope of his employment at the time of the accident but, based on the previous panel's decision, reversed for further proceedings on the issue of whether Mr. Welch was acting within the scope of his employment. See O'Shea v. Welch, 2004 WL 1376643 (10th Cir. June 21, 2004).
Shortly after the Circuit's opinion in the garnishment action was rendered, counsel for plaintiff and counsel for AMICO sent separate communications to the court concerning their views on whether the case should proceed with the judgment in place or whether the judgment should be set aside. On July 2, 2004, the court held a status conference with parties and ultimately directed counsel for AMICO to determine an appropriate procedural vehicle to get the issue properly before the court and to file said motion for the court's resolution. Thereafter, AMICO filed its motion to set aside the judgment. Both plaintiff and defendant Mr. Welch have responded to the motion and AMICO has replied to the responses. Having carefully considered the parties' briefs, the court is prepared to rule on the motion.
II. AMICO's Motion to Set Aside the Judgment
AMICO moves the court to set aside the August 15, 2002 judgment on the grounds that, under Kansas law, AMICO is not bound by the judgment. According to AMICO, it is not bound by the judgment because AMICO did not act in bad faith when it denied coverage in the underlying suit and the judgment is unreasonable as a matter of law. In the alternative, AMICO moves for an order permitting discovery on the issues of whether the amount of the judgment is reasonable and whether the parties to the covenant not to execute acted in good faith and without collusion.
AMICO's motion is brought pursuant to Federal Rule of Civil Procedure 60(b)(6). Both plaintiff and defendant Welch contend that AMICO's motion should be summarily denied because AMICO does not have standing to seek relief from the judgment under Rule 60. See Fed.R.Civ.P. 60(b) (the court may relieve "a party or party's legal representative" from a final judgment). The court need not address the standing issue because the court declines to set aside the judgment. Moreover, the court would reject the standing argument in any event as AMICO's motion is properly construed as one seeking summary judgment on the issue of whether it is liable for the judgment.
Bad Faith
The first question raised by the parties' briefs is whether plaintiff must show that AMICO acted in bad faith when it denied coverage in the underlying case before plaintiff can enforce the judgment against AMICO. AMICO argues that a showing of bad faith on its part is required under Kansas law and that, as plaintiff has never alleged that AMICO acted in bad faith, AMICO cannot be bound by the judgment. Plaintiff, on the other hand, argues that a showing of bad faith is required only in those cases in which a plaintiff is attempting to enforce a judgment that exceeds the insurer's policy limits. As the judgment in this case is within the policy limits, plaintiff contends that AMICO's bad faith (or lack thereof) is simply not relevant to a determination of whether AMICO can be bound by the judgment. As explained below, the court concludes that an insurer's bad faith is relevant only in those cases in which the judgment is in excess of the policy limits. Thus, as the judgment in this case is within the limits of the policy, plaintiff is not required to show that AMICO acted in bad faith. Stated another way, plaintiff can enforce the judgment against AMICO even in the absence of any showing that AMICO acted in bad faith.
The court begins with the Kansas Supreme Court's decision in Associated Wholesale Grocers, Inc. v. Americold Corporation, 261 Kan. 806 (1997). Americold involved lawsuits arising out of a fire in Americold's underground cold storage facility. See id. at 809. Americold had primary general liability coverage for tenant claims of $1 million through National Union Fire Insurance Company (National Union), with $25 million excess coverage through Northwestern Pacific Indemnity Company (NPIC). Id. National Union eventually tendered the $1 million policy limit to plaintiffs, who were various tenants and their subrogated insurers. Id. at 810.
NPIC disclaimed coverage, reasoning that the claimed damages were excluded by the policy's pollution exclusion, and declined to offer any amount in response to a policy limits settlement offer from plaintiffs. Id. Concluding that NPIC was denying coverage, Americold negotiated a settlement with the plaintiffs. Id. The settlement included consent judgments totaling more than $58 million, a covenant by the plaintiffs not to execute against the assets of Americold, and an assignment of Americold's claims against NPIC. Id. After the settlement, the plaintiffs filed a garnishment action against NPIC. Id. The district court granted summary judgment in favor of the plaintiffs, id., and the Kansas Supreme Court reversed. See id. at 811.
In reversing the district court's grant of summary judgment, the Kansas Supreme Court concluded that the pollution exclusion in the NPIC policy did not exclude coverage, but that material issues of fact remained as to the good faith and reasonableness of the settlement amount resulting in the consent judgments, NPIC's bad faith in denial of coverage and rejection of settlement within the policy limits, and NPIC's liability for the judgments over policy limits. See id. In remanding the case to the district court, the Kansas Supreme Court instructed that
[i]f the district court finds that the denial of coverage was in good faith, NPIC is not bound by the consent judgments but is liable for plaintiffs' covered damages up to the $25 million policy limit. If the district court finds that NPIC's denial of coverage was in bad faith, and the consent judgments represent a reasonable, good faith settlement, NPIC may be liable under the consent judgments.Id. at 853. Thus, the court in Americold recognized that an insurer may be liable for the amount of a settlement or consent judgment within policy limits even in the absence of bad faith. This holding is in accord with previous decisions from the Kansas courts. See, e.g., Glenn v. Fleming, 247 Kan. 296, 305 (1990) ("An insurance company may become liable for an amount in excess of its policy limits if it fails to act in good faith and without negligence when defending and settling claims against its insured."); George R. Winchell, Inc. v. Norris, 6 Kan. App. 2d 725, 730 (1981) ("As a general rule, a finding of bad faith is required for a finding of liability of amounts in excess of the policy limits.").
AMICO urges that a Kansas Court of Appeals decision, Fletcher v. Anderson, 27 Kan. App. 2d 276 (2000) — a decision that was rendered three years after the Americold decision — stands for the proposition that Kansas law requires a finding that the insurer acted in bad faith before the insurer may be held liable for a settlement or judgment within policy limits. The Fletcher case arose out of an automobile accident in which the plaintiff's son was killed. See id. at 278. Thereafter, the plaintiff sued defendant Jed Anderson, the brother of the driver of the vehicle, on the theory that he negligently entrusted the vehicle to his brother. See id. at 278-79.
Plaintiff claimed that defendant Anderson was an insured person under an automobile insurance policy issued to Mr. Anderson's mother by Farm Bureau. Id. at 279. The Farm Bureau policy had limits of $100,000 per person and $300,000 per accident. Id. Farm Bureau denied coverage, but provided a defense to Mr. Anderson under a written reservation of rights agreement. Id. Plaintiff's action was eventually tried to a jury and Farm Bureau defended Mr. Anderson at trial. Id. at 279, 285. The jury determined that plaintiff's damages were $3504.18 and that Jed Anderson was 10 percent at fault. Id. at 279. The result of the jury's verdict was a judgment against Mr. Anderson in the amount of $350.42. Id. Thereafter, the trial court granted a new trial on the issue of damages, leaving intact and binding the jury's determination that Mr. Anderson was only responsible for 10 percent of whatever damages a new jury might assess. Id. at 280.
At some point thereafter, a proposal was made to Mr. Anderson that he consent to a judgment against him in the amount of $50,000. Id. Mr. Anderson, over the objection of Farm Bureau, agreed to this settlement offer, which provided that plaintiff would not seek recovery against Mr. Anderson but would seek satisfaction only from potential insurance coverage. Id. at 280-81. Plaintiff then filed a garnishment action against Farm Bureau to satisfy the $50,000 judgment. Id. at 277. On the parties' cross-motions for summary judgment, the trial court denied Farm Bureau's motion and entered judgment in favor of plaintiff in the amount of $50,000. Id.
On appeal, the Kansas Court of Appeals reversed the trial court's decision in favor of plaintiff and remanded the case to the trial court with directions to enter summary judgment in favor of Farm Bureau. See id. at 290-91. In its discussion, the Fletcher court turned to the Kansas Supreme Court's decision in Americold for guidance in ascertaining "the circumstances under which an insurance company might be held responsible for a consent judgment to which it was not a party and to which it did not agree." See id. at 285-86. Relying on language from the Americold decision, the Fletcher court stated that Farm Bureau "can only be held liable if it was guilty of a bad faith denial of coverage and if it refused a reasonable settlement offer." See id. at 286.
AMICO, then, relies on this language in Fletcher, coupled with the fact that the consent judgment in Fletcher was within policy limits, to support its argument that plaintiff here must show that AMICO acted in bad faith. While the court ultimately rejects AMICO's argument, the argument certainly has a colorable basis, as the Fletcher court does, indeed, use the "bad faith" language in its opinion and, at first blush, does appear to place some significance on the fact that Farm Bureau did not act in bad faith. See id. at 287. A closer reading of the Fletcher decision, however, reveals that the court's emphasis on Farm Bureau's "bad faith" was in the context of the court's overarching discussion of the reasonableness of the amount of the consent judgment.
In that regard, the Fletcher court frames the question on appeal as "whether the consent judgment entered into by Jed [Anderson] was reasonable." See id. at 285. The court then frames "the other side of that same coin" as "whether Farm Bureau was unreasonable or negligent, or whether it acted in bad faith when it refused to agree to or pay the consent judgment." See id. Ultimately, the Fletcher court concluded that Farm Bureau was not bound by the consent judgment because the judgment was "unreasonable as a matter of law." See id. at 286-87. The court further concluded that "Farm Bureau was not unreasonable and did not act in bad faith in refusing to pay the consent judgment." See id. at 287. Thus, the Fletcher court uses the phrase "bad faith" in connection with its evaluation of the consent judgment at issue in the case and, more specifically, its evaluation of Farm Bureau's conduct in refusing to agree to or pay the consent judgment. By contrast, the Kansas Supreme Court in Americold emphasized that it is an insurer's bad faith in denying coverage that is required before a judgment in excess of policy limits will be enforced against that insurer. See Americold, 261 Kan. at 833, 846-47. For these reasons, the court does not accept AMICO's argument that Fletcher supports the conclusion that Kansas law requires a finding that the insurer acted in bad faith before the insurer may be held liable for a settlement or judgment within policy limits.
Reasonableness of the Judgment
Having concluded that AMICO's lack of bad faith is not relevant to whether the judgment can be enforced against AMICO (as the judgment is within the limits of the policy issued by AMICO), the court turns to analyze whether "the judgment is reasonable in amount and entered into in good faith," see Glenn v. Fleming, 247 Kan. 296, 318 (1990), a showing that all parties agree must be made before the judgment can be enforced against AMICO. As explained by the Kansas Supreme Court, the insured has the initial burden to make a prima facie case by producing evidence relating to good faith and reasonableness of the settlement. Id. The ultimate burden of proving that the settlement was made in bad faith or that it was unreasonable in amount rests with the insurer. Id. AMICO contends that the judgment is unreasonable as a matter of law or, in the alternative, that discovery is necessary to determine the reasonableness of the judgment. In response, plaintiff contends that the judgment is reasonable as a matter of law.
As mentioned above, Mr. O'Shea, Mr. Welch and Farmers entered into a "Consent to Judgment, Assignment and Covenant Not to Execute." That agreement, in part, stated as follows:
Welch and Farmers hereby consent to entry of judgment against Welch and in favor of O'Shea, in the matter known as O'Shea v. Welch et al., Case No. 01-2336-JWL, currently pending in the United States District Court for the District of Kansas at Kansas City. There will be a bench trial on the matter where O'Shea will present evidence concerning Welch's negligence and O'Shea's alleged damages. Attorney's [sic] for Welch and Farmers will be present, but agree not to contest O'Shea's evidence. Welch and Farmers agree to a waiver of jury trial and stipulate to the admission of O'Shea's evidence at trial. Welch and Farmers consent to the judgment entered as a result of the bench trial voluntarily and free of coercion. Welch and Farmers further agree that the judgment entered by the Court will represent a fair and reasonable determination and resolution of the liability claim asserted by O'Shea for past and future damages incurred as a result of the alleged negligence of Welch.
In consideration for Mr. Welch's consent to the judgment, Mr. O'Shea agreed not to execute or otherwise enforce the judgment entered against "any current or future personal assets or income of Welch, his heirs, executors, administrators, or successors in interest." Mr. O'Shea reserved the "right to recover from any available insurance coverages . . . that provided any coverage for O'Shea's injuries and damages."
The bench trial proceeded as reflected in the agreement and the result, as noted by the court, was a "trial" akin to a default judgment hearing. Consistent with the parties' agreement, neither Mr. Welch nor Farmers objected to any evidence introduced by plaintiff, challenged or attempted to contest any evidence introduced by plaintiff, attacked plaintiff's credibility or the credibility of any of plaintiff's witnesses, or presented any evidence on behalf of Mr. Welch. Ultimately, the court entered judgment in the amount of $1,014,503.70. This figure represented $27,986.12 for past medical expenses; $236,517.66 for future medical expenses; $35,000.00 for past lost earnings; $465,000.00 for future lost earnings; and $250,000.00 for pain and suffering.
According to plaintiff, the amount of the judgment is reasonable as a matter of law because the court, in connection with the August 13, 2002 bench trial, reviewed the evidence in the case and, thereafter, "entered a judgment it thought reasonable." The court cannot accept plaintiff's characterization of the judgment entered in this case. Consistent with their agreement, Mr. O'Shea, Mr. Welch and Farmers essentially agreed to the amount of plaintiff's damages and Mr. O'Shea introduced evidence supporting that figure. In entering judgment for Mr. O'Shea, the court merely noted that the uncontested evidence introduced by Mr. O'Shea was sufficient to support the amount of damages claimed by Mr. O'Shea. The court did not conclude that the amount of damages claimed by plaintiff was reasonable. In fact, the court reiterated throughout its opinion that neither Mr. Welch nor Farmers had done anything to show that the amounts claimed were unreasonable. The court also stated that, in reviewing the record, it found "grist for cross-examination" and questioned "whether it would arrive at the same result in a true adversary proceeding."
The court, then, easily rejects plaintiff's argument that the judgment is reasonable as a matter of law and turns to plaintiff's argument that, at a minimum, the evidence he produced at the August 13, 2002 trial is sufficient to satisfy his burden of presenting a prima facie case to establish the reasonableness of the amount. In Associated Wholesale Grocers, Inc. v. Americold Corp., 261 Kan. 806 (1997), the Kansas Supreme Court provided some guidance on the proof required to satisfy plaintiff's burden in a case where, like here, the parties have agreed to the amount of the judgment as well as a covenant not to execute such that the insured faces no exposure to pay and the parties, either at the "trial" or in connection with a consent judgment, are not adverse to one another. According to that court, such proof "requires, at a minimum, enough information for the district court to make an independent evaluation of the reasonableness of the settlement." See id. at 841. By way of example, the court suggested that "independent expert testimony evaluating the strengths and weaknesses of the parties' positions could be presented." See id. Of course, there was nothing "independent" about the evidence introduced by plaintiff at trial and certainly no evidence was presented that would assist in evaluating the "strengths and weaknesses" of the parties' positions.
The court in Americold also recommended, in ascertaining the reasonableness of the settlement amount, consideration of the releasing person's damages as well as any evidence of bad faith or collusion, among other factors. See id. According to plaintiff, Mr. O'Shea's damages were already determined by this court and were clearly supported by the evidence. As explained above, however, plaintiff's damages were not "determined" by the court. While sufficient evidence was introduced to support plaintiff's claim for damages, no evidence was introduced that might permit an independent evaluation of those damages. With respect to bad faith and collusion, plaintiff asserts that AMICO has come forward with no evidence of bad faith or collusion. However, plaintiff has the initial burden of showing that the settlement was entered into in good faith. See Glenn, 247 Kan. at 318. Plaintiff cannot satisfy this burden by simply pointing out the lack of AMICO's evidence on the issue.
Moreover, there is a significant possibility that the judgment in this case — a judgment to which the parties to the agreement essentially stipulated — is collusive. The Kansas Supreme Court has questioned whether such judgments "represent an arm's length determination of the value of the plaintiff's claim" and has questioned whether a judgment can be deemed reasonable when the amount has been determined by agreement of the parties — the equivalent of what happened in this case. See id. at 317-18. The parties' covenant not to execute effectively removed any conflicting interests (and, consequently, any hard bargaining that would tend to ensure a reasonable settlement) between plaintiff and the insured, Mr. Welch. With no personal exposure, Mr. Welch had no incentive to contest liability or damages; in fact, his interests were best served by agreeing to plaintiff's damages — whatever the amount — so long as plaintiff promised that Mr. Welch would not be personally responsible for those damages. Moreover, the record reflects that none of the parties to the agreement notified AMICO of the agreement (or of the "trial") prior to executing that agreement and there is no suggestion that the parties to the agreement had any negotiations whatsoever on damages. These factors, too, weigh in favor of a finding that the judgment is collusive and, as such, unreasonable. See id.
As should be readily apparent from the court's discussion, the court cannot conclude that the evidence produced at the August 13, 2002 trial is sufficient to satisfy plaintiff's burden of presenting a prima facie case to establish the reasonableness of the amount. In fact, several factors indicate that the judgment is unreasonable. Nonetheless, the court cannot conclude, as a matter of law, that the judgment is unreasonable on the record before it. While the court will permit discovery on the issues relevant to the reasonableness of the judgment, such discovery will not be necessary unless and until a jury determines in the underlying case that Mr. Welch was acting within the scope of his employment at the time of the accident. If the jury determines that Mr. Welch was not acting within the scope of his employment, then AMICO will not be liable for the judgment. For this reason, the court declines to order discovery relating to the reasonableness of the judgment until after the jury's verdict in the underlying case.
Moreover, for purposes of efficiency, the court will also have the jury in the underlying case try all issues relating to plaintiff's damages so that if the court ultimately concludes that the judgment is unreasonable (assuming that the court has to reach this issue because the jury decided that Mr. Welch was acting within the scope of his employment) then the parties will not be required to try the damages issues to another jury. In addition, the court will be able to consider the jury's findings relating to damages in its analysis of whether the amount of the judgment is reasonable.
Consistent with this approach, the parties in both the underlying case and this case — which are hereby consolidated as the court grants AMICO's unopposed motion to consolidate — are directed to contact Magistrate Judge O'Hara's chambers at their earliest possible convenience to discuss setting a schedule for the completion of any discovery that needs to take place prior to trial. The underlying case is hereby set for trial on the court's April 5, 2005 trial calendar.
IT IS THEREFORE ORDERED BY THE COURT that AMICO's motion to set aside the judgment (doc. #130) is denied and AMICO's motion to consolidate cases (doc. #132) is granted.
IT IS FURTHER ORDERED BY THE COURT THAT The underlying case is hereby set for trial on the court's April 5, 2005 trial calendar.